The Board of Ashok Leyland has unanimously approved a proposal to merge Hinduja Foundries Ltd (HFL) with itself at a meeting on Wednesday.

A press release from the commercial vehicle manufacturer Ashok Leyland, a Hinduja Group company, said the share exchange ratio provides for 40 equity shares of face value of ₹1 in Ashok Leyland for 100 shares of ₹10 in HFL; 133 shares in the vehicle manufacturer for every 1,000 GDRs of 2008 series in the foundry company; and 4,800 shares in Ashok Leyland for one GDR of 2016 series in HFL. The effective date of the proposed amalgamation is October 1, 2016.

Gopal Mahadevan, CFO, Ashok Leyland, told mediapersons the proposed merger will benefit both companies and is the “best option for all stakeholders”.

The foundry company is critical to Ashok Leyland as it supplies almost all of the vehicle makers requirement of castings which account for about one-third of HFL’s revenue. The balance is from others such as tractors and passenger vehicle makers.

Mahadevan emphasised following the merger HFL, even as a division of Ashok Leyland, will be an independent business with supplies to third parties continuing.

It is essentially a strong player in the segment and Ashok Leyland is “taking over a business it is comfortable with,” he said.

The foundry company has a total annual capacity of 1.2 lakh tonnes spread across two plants in Chennai suburbs. Its revenue in the 18-month period ending March 2016 was about ₹840 crore.

Ashok Leyland has a 2.6 per cent stake in HFL and a preferential capital of about ₹321 crore. HFL has accumulated losses of about ₹1,100 crore and debt of about ₹512 crore.

Mahadevan said that earlier capex through debt contributed to high interest outgo. The merger with Ashok Leyland will help address these issues, including high overheads. The vehicle manufacturer will avail itself of tax benefits from the merged company’s losses.

Post merger when eight crore shares will be issued, the promoters’ stake will go up marginally from 50.38 per cent to 51.4 per cent.

The fresh issue will result in a 2.46 per cent dilution in Ashok Leyland.

However, despite the benefits explained, stocks of both companies took a hit with HFL shares closing 20 per cent lower at ₹44 against the previous close of ₹54.95.

Ashok Leyland closed 3.5 per cent down at ₹81.55 (₹84.55).

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